It feels great to be debt free, especially if you've had some financial difficulties that were bringing your credit score down. You can concentrate on restoring your credit once you have paid off all your bills. You have a clean slate to use credit responsibly without running up high balances again. Your credit score will rise if you demonstrate your fiscal responsibility and build up a record of modest balances and on-time payments.
Step 1
Choose two or three credit cards to use if you still have mutiple accounts. This lets you build up a good payment history on more than one account. If your financial problems caused you to lose most of your accounts, you can still restore your credit if there is one remaining. If not, open a secured credit card account. You will have to make a deposit to cover the credit limit, but your usage and payments will be reported to the credit bureaus. Pat Curry of Bankrate says to avoid secured cards that charge an application fee and to shop around for the best annual fee and interest rate.
Step 2
Make some purchases every month on your credit cards. Don't overspend; limit yourself to paying for items such as groceries that you would be buying anyway because the money is already in your budget.
Step 3
Pay off the entire balance on your credit cards each month. You don't want to rebuild large balances once you are finally free. Paying each statement in full builds up a payment history while maintaining your debt free status. Send payments prior to the due date so there is no chance of late arrival. The FICO credit score company says on-time payments play a major role in restoring good credit.
Step 4
Convert any secured accounts to regular accounts as soon as you are able. Credit card companies will often raise your credit limit over your security deposit once you have built up a stellar payment history for at least six months to a year.
Step 5
Request a reduction in interest rates if your card issuers raised them when you were having financial problems. Many banks will boost your rate substantially if you make late payments. Ask for a lower rate once you have made progress in restoring your credit.
Tips and Warnings
- Your credit reports may contain errors that can be removed to help restore your credit. The Federal Trade Commission advises getting a copy of your report from Transunion, Equifax and Experian annually to check for errors. You are entitled to a free copy as long as you use the official annualcreditreport.com website. Make sure your debts are all showing as paid off, and dispute any incorrect negative entries. They will be removed if the credit bureaus cannot validate them.
- Don't close any credit card accounts you are not using. It may seem like a good idea, but older accounts actually help increase your credit score. FICO says it considers the length of your credit history, with older cards counting as a positive influence. Put the cards aside, and take them out once or twice a year to make a small purchase. This keeps the accounts open and active.
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